Home' Technology Review : January February 2008 Contents FEATURE STORY
TECHNOLOGY REVIEW JANUARY/ FEBRUARY
The irrational exuberance over ethanol that swept through
the American corn belt over the last few years has given way
to a dreary hangover, especially among those who invested
heavily in the sprawling production facilities now dotting
the rural landscape. It's the Midwest's version of the tech bubble,
and in some ways, it is remarkably familiar: overeager investors
enamored of a technology's seemingly unlimited potential ignore
what, at least in retrospect, are obvious economic realities.
More than a hundred biofuel factories, clustered largely in the
corn-growing states of Iowa, Minnesota, Illinois, Indiana, South
Dakota, and Nebraska, will produce 6.4 billion gallons of ethanol
this year, and another 74 facilities are under construction. Just 18
months ago, they were cash cows, churning out high-priced etha-
nol from low-priced corn, raising hopes of "energy independence"
among politicians, and capturing the attention---and money---of
venture capitalists from both the East and West Coasts.
Now ethanol producers are struggling, and many are losing
money. The price of a bushel of corn rose to record highs dur-
ing the year, exceeding $4.00 last winter before falling back to
around $3.50 in the summer, then rebounding this fall to near
$4.00 again. At the same time, ethanol prices plummeted as the
market for the alternative fuel, which is still used mainly as an
additive to gasoline, became saturated. In the face of these two
trends, profit margins vanished.
The doldrums of the ethanol market reflect the predictable
boom-and-bust cycle of any commodity: high prices drive
increased production, and soon the market is oversupplied, caus-
ing prices to crash. But the large-scale use of corn-derived ethanol
as a transportation fuel has economic problems all its own. Even
though crude oil is at near record prices, and companies that use
ethanol in their gasoline receive a federal tax credit of 51 cents
per gallon, ethanol struggles to compete economically. And with
limited infrastructure in place to distribute and sell the biofuel,
demand will remain uncertain for the foreseeable future.
More alarming, the boom in ethanol production is driving up
the price of food. Of the record 93 million acres of corn planted
in the United States in 2007, about 20 percent went to ethanol.
Since most of the rest is used to feed animals, the prices of beef,
milk, poultry, and pork are all a ected by increases in the cost of
corn. The international Organization for Economic Coöpera-
tion and Development (OECD) recently warned that the "rapid
growth of the biofuels industry" could bring about fundamental
shifts in agricultural markets worldwide and could even "cause
All this comes at a time when the need for alternatives to
petroleum-based transportation fuels is becoming urgent. At press
time, the price of crude oil was near $90 a barrel. And worries
about the impact of greenhouse-gas emissions from the roughly
142 billion gallons of gasoline used every year in the United States
are deepening. Expanded use of biofuels is central to the federal
government's long-term energy strategy. In his State of the Union
speech on January 23, 2007, President Bush set the goal of pro-
ducing 35 billion gallons of renewable and alternative fuels by
2017, citing the need for independence from foreign oil. The U.S.
Department of Energy has set the similar goal of replacing 30 per-
cent of gasoline use with biofuel use by 2030.
Hitting both targets, however, will require significant techno-
logical breakthroughs. In the United States, for now, ethanol means
the corn-derived version. (Brazilian producers were expected to
make 4.97 billion gallons of ethanol in 2007, mostly from sugar-
cane; but that semitropical crop is agriculturally viable in only a
few parts of the United States.) Even proponents of corn ethanol
say that its production levels cannot go much higher than around
15 billion gallons a year, which falls far short of Bush's goal.
The Price of Biofuels
MAKING ETHANOL FROM CORN IS
EXPENSIVE. BETTER BIOFUELS
ARE YEARS AWAY FROM THE GAS
TANK. FARMERS ARE RELUCTANT
TO CHANGE THEIR PRACTICES.
BUT DO WE REALLY HAVE ANY
ALTERNATIVE TO BIOFU ELS?
By DAVID ROTMAN
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